BofA Warns Treasury Regime Change Is Coming

Next week marks the beginning of May and the potential for a regime change in US Treasuries. As BofAML's Macneil Curry notes, historically the month of May coincides with a jump in Treasury volatility. A seasonal analysis of implied Treasury volatility using the MOVE Index (Merrill Option Volatility Estimate) shows that May is traditionally the second strongest monthly of the year after December. With the MOVE Index also showing signs of basing, and 10yr Treasury yields stuck in an increasingly unsustainable narrow range, this May is unlikely to disappoint. While the long term trend for US 10s suggests that Treasury yields should climb higher, in the near term we prefer to take a wait and see approach, watching for a break of the range extremes at 2.825% and 2.591%.

Via BofAML,

Chart of the week: Bullish seasonals for the MOVE Index

Since 1988 the month of May has consistently seen a rise in Treasury volatility. It is traditionally the second strongest month of the year. With the MOVE index showing signs of basing, this May is likely to remain true to seasonal norms.

The MOVE Index is basing

Price and momentum say that the MOVE Index is setting up for a substantial, bullish turn in trend. Seasonals say that the break is likely close at hand. A break of Wedge resistance (thick red trendline) at 64 would confirm the turn in trend, setting the stage for a push towards 80 and potentially beyond.

US 10yr yields are set for a breakout

The. 3 month range trade in US 10yr yields has taken historical volatility to unsustainably low levels. The last time the 200d Bollinger bands were this narrow was back in May 2007, which preceded a 4wk 55bps rise.

While the l/term trend is bearish; in the n/term, watch the 2.83%/2.59% range extremes and DON'T FADE A BREAKOUT.

And if the Roacheforque index goes negative between April 27 and May 4, the likelihood of a star cross in the Summers range, leaning Delta, could signal further weakness in the narrow band of the Y axis of Barsky's trailing interest rate derivative plot-line, which has also formed a cup and handle within the USD/UST tracking logarithm.

What you didn't understand is there is no economic growth engine to drive the yields higher. In fact, it is weakening, so they will go lower.

Why do people imagine there is about to be strong demand for borrowing? Without growth that doesn't happen, and how can there be growth with $100 oil? If there's no demand for loans, how can their price go up?

Well, look at the big players. The Fed says taper, China is experiencing debt tremors and capital outflows. If their trade surplus can't cover the outflows, they will be forced into using their currency reserves. Japan is running a trade deficit, perhaps their trade partners are interested in US government debt?Russia sure ain't buying, and Belgium, well who knows? So who would be buying?If POMO ends does that result in a scramble to park funds in US debt?If FX and interest rate swaps move wider, does that result in higher collateral demand?It seems MMF demands for collateral have been seperated from the market due to the Feds reverse- repo program.It all comes down to fundamentals... what will Yellen do?

Just wait to see what happens when the petro-dollar loses all its hegemony. The popping sound will be the dollar bubble popping and an ocean of foreign held US dollars flooding back to our shores and the refusal of foriengers to accept our US dollar. Treasuries at that point will no longer be preceived as safe. It will mean war of world wide scale.

The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.